EU crisis: Impact on India and what corporates have to say

MUMBAI/CHENNAI: When industry lobby groups from Assocham to Ficci were seeking policies in a meeting with commerce minister Anand Sharma on June 1 to counter a possible full-blown crisis in eurozone, a lone voice said it may even turn out to be an opportunity.

It is anybody's guess what will be the shape of global trade if banks in the continent and the eurozone blow up, but Indian exporters may be better positioned than a few years ago to move on to other growing markets in Africa and Asia, which the Europeans dominate now.

"The Indian government has introduced focused market schemes (special incentives) to diversify exports. So the crisis in Europe should be seen as an opportunity for India to break into the markets where they export," says Ramu Deora, chairman, All India Shippers Council.

If the eurozone crisis is not averted, India which has about a sixth of its total exports to the European Union, will face unemployment in the lower income category, such as textiles, one of the biggest employers.

Textiles, including readymade garments, account for about a fifth of the total exports to Europe.

The eurozone crisis has eliminated the benefits of a weak rupee, which is down 20% in a year, to Indian exporters as the spend-thrift consumers in the continent do something they are not used to in three decades - save.

The slump in spending by the Europeans will aggravate the Indian economic slowdown where growth rate has already dipped to a near year-low for the March quarter.

Companies that enjoyed cheap money from European banks, such as Deutsche Bank and BNP Paribas, for expansion and acquisitions are beginning to feel the pinch as battered lenders in the continent slam the doors on Indian firms.

Even if the weekend elections in Greece bring in a coalition that would ensure the beleaguered nation stays in the European monetary union, it may be long before the demand for Indian goods and services rise in Europe.

Individuals, companies and nations will first use the opportunity to repair their balances sheets with an austere life before getting to the old splurging habits amid high unemployment, which in countries such as Spain is as high as 25%.

"The growth rate in India is slowing down, it will slow down further," says Enrico Atanasio, senior vicepresident, commercial, Fiat India Automobiles Ltd. "If it (the eurozone collapses) happens, the implications will be very strong."

Given that European banks which lent liberally during the boom period are advocating belt-tightening, the market growth for Indian products and services may be delayed.

"Europe is finding itself at the crossroads and there is only one way forward, and that is reduction of deficits," said Anshu Jain, Co-CEO of Deutsche Bank. "We are experiencing one of the worst financial crises in the history of modern Europe and its end is open," said Jain.

"Exports to Europe is not as much as before. We have diversified our exports well in the last two to three years to new markets in Latin America, Africa, China, Asean and Middle East & North African (Mena) countries. The Indian government has introduced focused market schemes (special incentives) to diversify exports. The crisis in Europe should thus be seen as an opportunity for India to break into the markets where they export.

The Indian government should build infrastructure such as better roads, ports so that we become more competitive. A declining rupee is good for exporters but our labour costs are also rising exponentially making some of our industries less competitive visa-vis our Asian neighbours. Freight rates per container to China are cheaper than a local shipment by road. Why should it be so?"

Enrico Atanasio

SR VP, COMMERCIAL, HEAD OF SALES FIAT INDIA AUTOMOBILES LIMITED

"The European banking ecosystem will not collapse. I am sure, the authorities will adopt the right ways and means to mitigate the crisis. But if it happens, the implications will be very strong and I am sure everybody will be impacted, including India. The growth rate in India is slowing down, it will slow down further."

How bad will India be hurt if eurozone breaks and if the European banking system collapses?

Impact on exports is likely to be limited as India's exports are well diversified. Share of India's exports to Europe is low and the rupee is likely to depreciate, making imports more expensive. Services and certain export-oriented sectors are likely to benefit by the devaluation of rupee while there may be some pressures on the demand side.

FIIs are expected to withdraw from emerging markets and drift towards safe haven assets. The overall impact is likely to be lower on India. As far as Marico is concerned, we are looking towards growth in India and in other emerging markets of Asia and Africa. We do not have any exposure to Europe.

What can the Indian government do to buffer companies from the euro crisis?

The government must fast-track policy reforms to boost investor confi dence. It is very important to restore the confi dence in the domestic consumption story. In case the eurozone breaks up, the government may have to take steps to infuse adequate liquidity in the system to support capital formation and investment.